TNAG-0638-FCO40-786-Supplies-of-electricity-for-Hong-Kong-1977 — Page 5

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(a)

(b)

(c)

the necessary adjustment would be made forthwith provided the adjusted tariff increases were within 0.8 cents per unit of the tariff increases agreed for that year in the Financing Review; or

if the adjustment in tariffs was more than 0.8 cents but not more than 1.6 cents, the proposed increase would be referred to Honourable Members for advice;

or

if the adjustment in tariffs was more than 1.6 cents, a further 'Financing Review' would be held.

This 0.8 cents per unit ceiling limit (non-cumulative) was selected after studying the results of several sensitivity tests which were devised to reflect the effect on tariffs, during the period, of various reductions in sales and also of higher expenditure caused by inflation. For example,

a fall in sales of about 1% per annum between 1978 and 1980 would necessitate an increase in the tariff of about 0.7 cents per unit above the 1981 projected level. Accordingly it was felt to be reasonable to allow for a margin of error of about this size.

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In the event of the Government and CLP failing to agree on the revision necessary or of the Executive Council's approval being required under (b) or (c) above, CLP would be allowed to adjust tariffs as from the following 1st February on an interim basis in such a way that they would not exceed the limit of 0.8 cents per unit.

(f) Interest Rate on the Development Fund

(paragraphs 35-40 of Annex A)

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After detailed discussion with CLP, it was agreed that, in accordance with the brief to the Government side, the interest rate, calculate on the average of the opening and closing balances of the Development Fund in each year, should remain unchanged at 8% (paragraph B3 of Annex B). CLP proposed that the interest charged should continue to be credited to a Rate Reduction Reserve and be used to reduce charges to consumers in the following year. This variation from the brief (which suggested that the interest should be added to the Development Fund) seems acceptable on public relations grounds. The possibility of a variable interest rate related either to the return to shareholders or to market lending rates was not pursued so as to achieve consistency with the Government side's approach to the permitted return (see paragraph 6 above).

CONFIDENTIAL